M&A activity in GCC region to gain pace amid Covid-19

04 June 2020 Consultancy-me.com

Merger and acquisition (M&A) activity in Saudi Arabia and other Gulf countries are expected to increase amid the Covid-19 pandemic as small and medium enterprises (SMEs), and several large corporates will  look for equity via capital injections to satisfy working capital needs, according to Ali Maabreh, Head of M&A at KPMG in Saudi Arabia.

“The current pandemic is creating a lot of uncertainties and contradictions in what to expect after the dust settles. The expected key impacts on companies are shortages of liquidity and working capital requirements. Though companies might be running a healthy profit & loss, there will be significant pressure on working capital requirements,” he said.

“Deal making going forward will favour buyers, but such assumptions are heavily dependent on investors being bullish in seizing investment opportunities.”

Nonetheless, buyers will be subjected to the impact of the pandemic on businesses as deals will encompass complex structures protecting and indemnifying buyers. Buyers will also have to be creative when it comes to valuation approach, valuating companies based on historical performance, and post-Covid business plans, writing off and normalising the impact of the pandemic.

“Working capital requirements will drive merger and acquisition activity in the Gulf.”
– Ali Maabereh, Head of M&A at KPMG in Saudi Arabia

“The need for immediate cash could drive the acceptance of low valuation multiples offered by buyers,” Maabereh added.

Another major change in the M&A landscape will be the sectors of focus for investors in Saudi Arabia and the region as sectors such as aviation will suffer from the pandemic and will require years to recover. Other sectors, such as healthcare and food & beverage, will emerge as defensive.

Maabereh indicated that the focus of investors within the food & beverage sector will shift towards backend businesses such as food production and supply, rather than retail.

Driven by the turmoil in oil prices, investors in Saudi Arabia will continue to focus on sectors that would emphasise economic diversification and sustainability as identified by the government. In addition, sectors such as industry and manufacturing will continue to attract investors, driven by the Saudi government's push for local satisfaction of economic needs.

“Despite dry-powder increasing globally over the past couple of years, it is not a luxury the region partakes, except for a handful of private equity funds, family investment offices, and regional sovereign wealth funds (like the Public Investment Fund) who are preparing pipelines of acquisitions since the markets are in their favour,” noted Maabereh.

The GCC region will serve as an opportunity for portfolio diversification of global conglomerates, specifically in Saudi Arabia with the new ease of restrictions for foreign investors.

“Even though warranties are most probably going to be in-favour and dictated by buyers given the risk associated with any potential transaction, deals are likely to be structured in ways to protect buyers such as earnouts, leveraged buyouts, mezzanine funding and shareholder loans,” he concluded.